Federal Reserve Credit jumped $28.0bn to a record $2.547 TN (18-wk gain of
$266bn). Fed Credit was up $139bn y-t-d and $284bn from a year ago, or 12.6%.
Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended
3/9) rose $12.3bn to a record $3.397 TN. "Custody holdings" were up $415bn
from a year ago, or 13.9%.

Global central bank "international reserve assets" (excluding gold) - as tallied
by Bloomberg - were up $1.545 TN y-o-y, or 19.8%, to a record $9.365 TN.

Total Commercial Paper outstanding declined $1.1bn to $1.063 Trillion. CP
is up $93.7bn y-t-d, although it was down $82bn, or 7.2% from a year ago.

Global Credit Market Watch:

March 10 - Financial Times (Richard Milne and Peter Wise): "The cost of borrowing
for Portugal, Ireland and Greece has hit euro-era highs, amid concern in the
market that European leaders will fail to take concerted action to dispel fears
of sovereign defaults. The long-term market interest rate for Spain has come
close to setting a record and Italy's borrowing cost rose above 5% for the
first time since November 2008."

March 10 - Bloomberg (Emma Ross-Thomas): "Spain's credit rating was cut to
Aa2 by Moody's... which said the cost of shoring up the banking industry will
eclipse government estimates... The risks to public finances are 'skewed to
the downside,' the company said... The outlook is 'negative,' suggesting more
rating cuts are under consideration."

March 10 - Bloomberg: "China, America's largest creditor, should stop buying
U.S. Treasuries because the 'cost' of lending to a nation that may face a default
on its debt is too high, said former Chinese central bank adviser Yu Yongding...
'China has kept on lending money to the U.S. to keep its export machine going,
and to prevent losses' on its holdings of Treasuries, said Yu. 'Perhaps it
is too late to do anything about the existing stock without causing a serious
political and financial backlash. But at least China should stop continuing
building up its holdings.'"

March 7 - Bloomberg (Simon Kennedy): "Emerging-market central banks risk triggering
a '1994-style' sell-off in global bonds as soon as next year if they're still
tightening monetary policy when the Federal Reserve begins raising interest
rates. That's the warning of JPMorgan... Chief Economist Bruce Kasman, who
calculates that even with recent increases, benchmark rates in developing countries
remain about 200 basis points below their 2008 average and, adjusted for inflation,
will end this year near their recession lows. Underlying inflation levels also
are moving higher, he finds. A reluctance to act faster means the central banks
of these economies ultimately may fail to contain inflation at home while fanning
it abroad..."

Muni Watch:

March 7 - Bloomberg (David Mildenberg): "Texas Republicans in the House of
Representatives may vote as early as tomorrow on using $4.3 billion in reserve
funds to close a deficit for the current fiscal year, according to the chamber's
lead budget writer."

Global Bubble Watch:

March 11 - Bloomberg: "China's central bank considers more than consumer-price
increases when making interest rate decisions, including the impact on capital
flows, said Governor Zhou Xiaochuan. The People's Bank of China's desire to
keep the return on deposits above the pace of inflation, ensuring positive
real rates over the medium term, must be balanced with the impact higher rates
have on the cost of capital and inflows of funds from overseas, Zhou said.
As a result, China will at times in the short term have negative real rates
as consumer-price gains outpace rate increases, he said. 'Interest rate adjustment
should not only focus on consumer-price inflation,' Zhou said... 'It has many
other policy targets.'"

March 8 - Financial Times (Anousha Sakoui): "Sovereign wealth funds increased
their assets under management by 11% over the past year to $4,000bn, for the
second year in succession... While some SWFs have suffered withdrawals, the
aggregate assets under management increased from $3,590bn in 2010 to $3,980bn
at the start of 2011... Ian Moore, partner at law firm Norton Rose, said the
results highlighted how SWFs had made changes in their approach to investing.
'They have come out of the tough times looking robust and making a recovery
that people might not have expected a couple of years ago,' said Mr Moore."

March 7 - Bloomberg (Jeff Kearns): "Global derivatives trading on exchanges
rose the most since 2003 last year as volume for contracts listed to commodities
surged, the World Federation of Exchanges said. Volume rose 25% to 22.4 billion
contracts last year... Commodity derivatives trading rose 34%, with Chinese
exchanges making up more than half of that volume... Investors are turning
to exchange-listed derivatives instead of private, customized over-the-counter
transactions... Futures trading increased 35% last year to 11.2 billion contracts
while options trading rose 16% to 11.1 billion..."

March 7 - Bloomberg (Zachary R. Mider and Jeffrey McCracken): "The merger
boom that started in 2010 isn't looking like any of the past three. The takeover
binge of the 1980s was fueled by Michael Milken's junk bonds; the late- 1990s
wave of Internet and telecom deals, by inflated stock prices; and the private-equity
frenzy that produced a record year for deals in 2007, by leveraged loans. The
more recent surge comes from the expanding BRIC economies -- Brazil, Russia,
India and China -- and beyond. Deals are rising among the companies that supply
raw materials to these countries. Worldwide deals in energy, power and basic
materials made up about a third of the merger and acquisition market in 2010,
compared with about 20% in the previous decade... Emerging-market acquisitions
helped the total value of announced deals for 2010 grow 27% to $2.2 trillion,
driving up advisory fees."

March 9 - Bloomberg (Sapna Maheshwari): "Leon Black's Apollo Global Management
LLC and Fortress Investment Group LLC are bringing back bonds that let companies
make interest payments in the form of extra debt as investors chase returns
about 12 times greater than those for investment-grade securities... Sales
of the bonds have more than tripled this year to $1.3 billion from $375 million
in all of 2010... 'I actually thought these kinds of deals would be dead after
the last meltdown because some of these PIK notes traded down to worthless,'
said Marc Gross, a money manager... at RS Investments... Investors are 'going
out as far as they can on the risk spectrum,' he said."

March 8 - Financial Times (Aline van Duyn): "Demand is growing for 'synthetic'
financial instruments that enable investors to take positions in the US junk
bond market without owning the underlying securities. The instruments, created
by using credit derivatives on junk bond or high-yield indices, resemble transactions
linked to US mortgages that proliferated before the financial crisis. The collapse
of these synthetic mortgage-backed collateralised debt obligations when mortgages
turned sour was a big feature of the crisis... Now, hedge funds are buying
the riskiest parts of instruments linked to bonds. This demand reflects more
bullish views on the US economy, which investors believe will translate into
lower corporate defaults. 'We see much interest in synthetic high yield, more
than we would have predicted just a few months ago,' said Sivan Mahadevan,
managing director at Morgan Stanley."

Currency Watch:

The U.S. dollar index rallied 0.4% to 76.685 (down 3.0% y-t-d). On the upside
for the week, the Mexican peso increased 0.8%, the New Zealand dollar 0.6%,
the Japanese yen 0.6%, and the Swedish krona 0.2%. On the downside, the British
pound declined 1.2%, the South Korean won 0.9%, the Taiwanese dollar 0.7%,
the Danish krone 0.7%, the Brazilian real 0.6%, the Euro 0.6%, and the Norwegian
krone 0.5%.

Commodities and Food Watch:

March 10 - Bloomberg (Isis Almeida): "The price of Colombian mild coffee soared
to the highest price in almost 34 years as global stockpiles of beans dropped
to the lowest levels since records began, according to the International Coffee
Organization... Coffee inventories in exporting countries are 13 million bags,
according to the London-based group. 'That's the lowest stocks in recorded
history,' Jose Sette, head of the organization..."

March 11 - Bloomberg: "China's inflation and industrial production exceeded
forecasts in February, underscoring the challenge for Premier Wen Jiabao as
he seeks to prevent price increases from stirring social unrest. Consumer prices
rose at an annual 4.9% pace in February and output increased 14% in the first
two months of 2011... Producer prices jumped 7.2% last month, the most since
September 2008. Today's reports signaled the central bank's monetary tightening
has been insufficient so far to contain prices, in an echo of pressures across
Asia that spurred South Korea, Thailand and Vietnam to raise interest rates
this week... 'Inflation risk is very high as oil prices and food costs are
rising, and wages have increased substantially,' said Shen Jianguang... economist
at Mizuho Securities Asia..."

March 7 - Bloomberg: "Premier Wen Jiabao's pledge to stem inflation in China
underscored forecasts for more interest-rate increases as a jump in food and
housing prices risks sparking public anger. Wen... said that reining in consumer
and property prices is the nation's top priority. That will be welcome to fruit
vendor Song Zhiqiang, 56, of the southwestern city of Guiyang, who says: 'My
rent's doubled in a year and my family's food budget has increased to 3,000
yuan, 'or $456, from 1,200 yuan... Without higher deposit rates to encourage
saving, and a stronger currency to ease import costs, the risk is that price
pressures will keep escalating in coming months. 'The skew of risks is very
much for an extended period of uncontained inflation,' said Glenn Maguire,
chief Asia economist at Societe Generale ... 'The danger is that inflation
spikes as high as 10% in the third quarter, causing households tremendous pain
and fuelling widespread social discontent.'"

March 9 - Bloomberg: "China's passenger-car sales growth in February fell
to the slowest in more than two years after the government ended vehicle-buying
incentives and a week-long national holiday stymied demand. Wholesales of passenger
cars... increased 2.6% from a year earlier to 967,200 units last month..."

March 9 - Bloomberg (Phoebe Sedgman): "China's milk imports from New Zealand
surged more than five-fold since 2008 as rising incomes stoked demand, sending
prices to a record and bolstering the economy as it recovers from the deadliest
earthquake in 80 years."

Japan Watch:

March 11 - Bloomberg (Christopher Anstey and Mayumi Otsuma): "Japan's central
bank pledged to ensure financial stability after the strongest earthquake in
at least a century..."

March 10 - Bloomberg (Keiko Ujikane): "Japan's economy contracted more than
the government initially estimated in the fourth quarter... Gross domestic
product shrank at an annualized 1.3% rate in the three months ended Dec. 31..."

Asia Bubble Watch:

March 10 - Wall Street Journal (Patrick Barta): "Fears are growing that Asia's
recent troubles with inflation could go deeper than initially expected as countries
bump up against labor shortages and other problems commonly seen in times of
too-fast growth. Inflation concerns in Asia have grown in the past few months,
but have focused on rising food costs... But unease is now growing around so-called
core inflation, which typically excludes volatile elements such as energy and
food, and which has also been rising in much of the region."

March 10 - Bloomberg (Simon Packard): "The money earmarked for property investments
in the Asia-Pacific region rose 45% in the second half as China's expanding
economy made them more attractive, according to estimates compiled by DTZ Group
Plc. Real-estate funds and companies had about $104 billion available for investments
in the region, up from $71 billion a year earlier..."

India Watch:

March 10 - Bloomberg (Kartikay Mehrotra): "India's exports rose at a faster
pace last month... supporting economic growth and providing scope for the central
bank to raise interest rates. Merchandise shipments surged 49.8% to $23.6 billion
in February from a year earlier... That compares with the 32.4% gain in January
and would be the biggest increase in 11 months..."

March 10 - Bloomberg (Ameya Karve and Anil Varma): "Finance Minister Pranab
Mukherjee's plan to raise 400 billion rupees ($9bn) from asset sales to narrow
the budget deficit spurred almost $1 billion in capital inflows into India
in a week, the most in two months."

March 9 - Bloomberg (Karthikeyan Sundaram and Siddharth Philip): "Car sales
in India rose to a record for the second month in February... Deliveries climbed
23% to 189,008 vehicles..."

Latin America Watch:

March 7 - Bloomberg (Randy Woods and Sebastian Boyd): "Chile's economy expanded
in January at the fastest pace since August as retail sales surged... The central
bank's monthly Imacec indicator, a proxy for gross domestic product, increased
6.8% from a year ago..."

Unbalanced Global Economy Watch:

March 10 - Financial Times (Alan Rappeport): "The number of billionaires in
leading emerging economies has surpassed the number of those in Europe for
the first time and is quickly closing in on the US, according to... Forbes.
The US still has the world's most billionaires with 413 individuals with a
total net worth of $1,500bn. At the beginning of this year, the Brics countries-
Brazil, Russia, India and China - had 301 billionaires, 108 more than in the
previous year, and one more than Europe. 'The global billionaires this year
reflect what's going on in the global economy,' said Steve Forbes... As the
world economy recovered, the number of billionaires rose to a record 1,210
in 2011, boasting a total net worth of $4,500bn... The regional breakdown,
however, reveals diverging fortunes. In Asia, the number of billionaires has
nearly tripled in the past two years to 332, with 115 in mainland China alone...
India's 55 billionaires have an average net worth of $4.5bn... Japan, once
the economic engine of Asia, is now lagging with just 26 billionaires. Europe's
fortunes are also starting to slow, with its number of billionaires overtaken
by Asia for the first time in more than a decade. Booming commodity prices
have helped Russian billionaires."

U.S. Bubble Economy Watch:

March 10 - Bloomberg (Shobhana Chandra): "The U.S. trade deficit widened more
than forecast in January to the highest level in seven months as a surge in
imports led by costlier crude oil overshadowed record exports. The gap in goods
and services increased 15% to $46.3 billion, from $40.3 billion in December...
Imports jumped 5.2%, the most since March 1993, while exports grew 2.7%...
Imports were the highest since August 2008..."

March 10 - Bloomberg (Ashley Lutz): "When Vaughn Bullman moved to Drummer
Avenue in 1961, thousands of people built cash registers at the NCR Corp. in
Dayton, Ohio, and assembled cars at a General Motors Co. plant in nearby Moraine.
Now, 10 of Drummer Avenue's 30 houses are empty... NCR and General Motors are
gone... 'This whole street used to be full of families who owned their homes,'
said Bullman... 'Today, the neighborhood is so different because there is no
feel of community and no way to take pride in living here.' Dayton has 21.1%
of its housing stock vacant... The city exemplifies a trend in Ohio of depopulation
and de- industrialization. That means less tax revenue, fewer jobs and less
political clout."

March 10 - Bloomberg (Clea Benson): "Two years ago, 97% of senior citizens
who took out reverse mortgages withdrew their home equity in small amounts
at variable interest rates whenever they needed some extra cash. Today, more
than 70% of reverse-mortgage borrowers choose to take the maximum amount of
equity out of their houses in one lump sum and pay a fixed interest rate. The
dramatic shift is the outcome of federal policy changes governing the secondary
market for reverse mortgages, analysts say. Federal programs have pumped new
investor capital into the reverse-mortgage industry, helping lenders such as
Urban Financial Group Inc. and Wells Fargo & Co. originate more loans."

March 11 - Bloomberg (Mason Levinson): "The New York Knicks said they will
raise season-ticket prices by an average of 49% next National Basketball Association
season, while the National Hockey League's New York Rangers will boost average
seat costs by 23%."

Fiscal Watch:

March 10 - Bloomberg (Vincent Del Giudice): "The U.S. government, facing a
record annual fiscal shortfall and a congressional impasse over financing,
posted the largest monthly deficit ever in February, reflecting increased spending.
The gap totaled $222.5 billion last month compared with a $220.9 billion shortfall
in February 2010... This year's budget deficit is projected to reach $1.5 trillion...
The Treasury's report today showed that government spending rose 1.4% in February
to $333.2 billion and revenue and other fees increased 2.9% to $110.7 billion.
Individual income tax receipts rose 26.6% to $422.8 billion on a fiscal year-to-date
basis. Corporate income tax receipts fell 15.9% on a fiscal year-to-date basis..."

March 4 - Bloomberg (Eric Engleman): "The U.S. Social Security Administration's
aging computer center is increasingly likely to fail and snarl the processing
of thousands of applications for mortgages, credit cards and driver's licenses,
officials say. The agency houses its trove of records on 460 million people,
living and dead, in a 32-year-old building plagued with electrical and plumbing
problems that may bring its computers to a crashing halt..."

Central Banking Watch:

March 7 - Bloomberg (Steve Matthews): "Federal Reserve Bank of Atlanta President
Dennis Lockhart said the central bank shouldn't rule out asset purchases beyond
the $600 billion planned by June because the U.S. economy could slow again.
'With the information I have today, my first inclination is to be very cautious
about extending asset purchases after June,' Lockhart said... 'Given the emergence
of new risks, however, I prefer a posture of flexibility as regards policy
options.' Lockhart's comments echoed Fed Chairman Ben S. Bernanke, who told
Congress last week that economic conditions continue to justify holding the
central bank's target rate at near zero as well as additional monetary stimulus."

California Watch:

March 9 - Bloomberg (Michael B. Marois): "California Governor Jerry Brown's
self-touted political acumen will be put the test as his plan to erase a resurgent
$25.4 billion deficit goes before the state Legislature. Lawmakers... are scheduled
to begin voting as early as tomorrow on his package of budget bills and companion
measures that would slash spending by $12.5 billion and call a special election
in June for voters to decide on extending more than $9.3 billion of tax increases..."

March 9 - Bloomberg (James Nash): "California's tax and fee collections for
February fell 2.4% short of projections in Governor Jerry Brown's proposed
budget... Receipts totaled $5.66 billion, or $139.4 million less than the amount
forecast... California faces the biggest deficit of all U.S. states, and has
the lowest credit rating. Brown proposes $12.5 billion of spending reductions
and wants lawmakers to call a special election in June on extending more than
$9.3 billion in higher vehicle fees, sales taxes and income-tax rates to avoid
even deeper cuts. State collections for the month were 5.4% lower than a year
earlier, led by a 7.1% decrease in sales taxes and an almost 50% drop in corporate
taxes, Chiang said."

Speculator Watch:

March 6 - Financial Times (Peter Garnham): "Hedge funds and forex dealers
are betting record amounts against the dollar, reflecting a growing belief
that the US currency has lost its haven appeal and that eurozone interest rates
will soon rise... Figures from the Chicago Mercantile Exchange, which are often
used as a proxy for hedge fund activity, showed that short dollar positions
surged from 200,564 contracts in the week ending February 22 to 281,088 on
March 1. This meant that the value of bets against the dollar on the CME rose
$11.5bn in the week to March 1 to $39bn, $3bn more than the previous record
of $36bn in 2007."

Risk and the Dollar Carry Trade

Civil war unleashed in Libya, protests turn violent in Saudi Arabia, and deep
social unrest throughout much of the Middle East. And today Japan is hit by
its worst earthquake in 140 years. Here at home, ugly twin deficit news had
a record $223bn federal deficit and a dismal $46.3bn trade deficit for the
single month of February. And whether it is risk associated with high food
and energy prices, earthquakes, flood and droughts, or financial market instability,
it doesn't take much these days to entice the market into a bout of speculating
on QE3. It shouldn't be all too difficult this week to convince folks that
the market environment is risky.

Yet, U.S. markets have done an especially notable job of late downplaying
heightened risk. Things seemed to begin to change Thursday. The broader equity
market, in particular, was under significant selling pressure. At the same
time, bond market Credit premiums began to rise meaningfully. MBS, municipal
and investment grade corporate spreads all widened. An index of junk bond risk
(CDX) jumped 12 basis points. At the same time, the dollar rallied.

I don't believe it is any coincidence that U.S. and global risk markets now
trade tightly with the inverse of the dollar. This is not a new dynamic, of
course. For some time now, structural dollar weakness has supported the steady
(escalating?) flow of finance from the U.S. "Core" out to the "Periphery." This
now fully entrenched Monetary Process has been fundamental in spurring a self-reinforcing
flow of finance to the emerging markets and economies, along with driving price
inflation throughout the commodities complex. The "core to periphery" dynamic
has done wonders for emerging market Credit systems, powerhouses that today
enjoy robustness and resilience of uncommon proportions.

As one would expect from prolonged periods of loose finance and expanding
Credit, excesses and imbalances have mounted. Around the "periphery," respective
booms have taken on lives of their own. Not to worry, as the probability of
a (nineties-style) destabilizing flight back to the lowly dollar is perceived
as slim to none.

In a world of uncertainties, I would place "the dimensions of the dollar carry
trade" near the top of my wish list of things beckoning for some clarity. There
is no doubt that by late-2007 enormous speculation positions against the dollar
had accumulated, proceeds from "shorts" that were financing holdings of higher
returning assets (emerging debt and equities, global sovereigns and corporate,
leveraged loans, commodities, etc.). On the margin, liquidity emanating from
these trades had become integral to overall market liquidity. To be sure, the
predictability of Fed monetary policy and the attendant steep 2007 dollar decline
- that persisted well into 2008 - made it too easy to garner speculative profits
in non-dollar assets. And as the 2008 crisis unfolded, the unwind of bearish
dollar bets - and resulting de-leveraging - were instrumental in fomenting
acute illiquidity, uncertainty and fragility.

The dollar has been trending lower for much of the past 10 months. Dollar
bearishness has again become prominent, underpinned by about the most dollar
bearish fiscal and monetary backdrop imaginable. And not dissimilar to '07/early-'08,
commodities markets have been on a run. For the most part, borrowing in dollars
and lending/speculating elsewhere has provided an ongoing profit bonanza. Especially
knowing that hedge fund and sovereign wealth fund assets have recovered back
to record levels, it's not crazy to suspect that that the old "dollar carry
trade" has re-emerged as well.

Those of the bullish persuasion have been emboldened by market resiliency.
It's been a record run - and classic "climb the wall of worry" - for global
risk assets. Bonds and stocks have largely disregarded rising global inflation
pressures. Surging food and energy prices - with prospects for hoarding, food
riots and mayhem - have been a market yawner. Middle East unrest and a brutal
civil war in Libya hardly garnered a market response. Tightening measures in
China and throughout Asia, along with recent hawkish talk from the ECB, captured
a few headlines but little market attention. Little wonder the bulls enjoy
that cozy bulletproof feeling.

As tempting as it is to bemoan the marketplace for ignoring important fundamental
developments, I suspect (the big and powerful) players are instead keenly focused
on crucial market dynamics. China/Asia tightening might typically be seen as
a bearish development, except that moderately rising rates only strengthen
the magnetic force attracting torrents of finance from the "Core" out to the
vast "Periphery."

Surging commodities markets and heightened inflation would in the past have
been cause for worry. Nope. Not today, as they bolster the case for shorting
dollars and speculating in anything "undollar." Besides, rising commodities
prices and global inflation are perceived to bolster the creditworthiness of
much of the (resource rich) periphery.

Unrest, civil war and potential energy supply disruptions should promote a
bad case of market angst - you'd think - except when additional uncertainty
and vulnerabilities increase the probabilities for QE3 - and another round
of policy-induced dollar devaluation. A tightening of monetary conditions in
the Eurozone is today no cause for alarm, not if it ensures widening interest-rate
differentials to the U.S. and unrelenting dollar headwinds. And a devastating
quake equates with more loose money.

U.S. stocks today handily disregarded added uncertainties wrought from the
devastating Japanese earthquake. And it must not have hurt sentiment that the
dollar was today comfortably back in its losing ways. I've posited for a couple
years now that policymaking unleashed a new Bubble. This Bubble is big and
it is global, and I suspect dollar weakness and attendant speculative flows
have become a force to be reckoned with. And I get especially concerned when
I see speculative market dynamics trump troubling fundamental developments.

So far, 2011 has brought a few market cracks and the occasional whiff of tumult.
The resources stocks were hammered to begin the year. Emerging equities have
disappointed. Commodities and equities have turned increasingly volatile (i.e.
crude, wheat, semiconductors...) - one could argue unstable. The respite in
the European periphery debt crisis has come to an end, perhaps portending a
similar circumstance for the U.S. municipal debt market. The world is, after
all, not oblivious to structural debt issues. The accident in waiting - referred
to generally as the "Treasury market" - is garnering increasing amounts of
attention (none constructive). On a few occasions, it has seemed almost as
if the leveraged players were about to find themselves on the wrong side of
the markets. But throughout it all, the old stalwart weak dollar has refused
to let the marketplace down. Presuming that myriad global uncertainties will
not find resolution anytime soon, I'm left pondering how the markets will react
when the dollar inevitably musters some sort of rally.